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Friday, January 4, 2013

Government Should Borrow More, Not Tax More

Fiscal Cliff has been averted, at least for two more months where we will have an even bigger cliff to hurdle. Of course, I never liked the term 'fiscal cliff' since it implied there's some sort of inherent government insolvency issue even though that was never the issue. It has been and will continue to be a political cliff - caused and created solely by inept politicians (congress).

Our present national public debt stands at around $12 trillion (76% of GDP roughly). That number sounds big, but since the debt essentially represents money we owe ourselves, the number itself is relatively meaningless unless compared to other things. This point is something radical (read: mainstream) Republicans don't seem to grasp. The bill to avert the fiscal cliff for now passed but no thanks to 100+ of these mainstream radicals that are more concerned about this meaningless number than the ability of our fragile economy to continue to grow.

So, what should the number be compared to? Well, if the government is racking up 'too much debt', interest rates will tend to rise and inflation will spiral out of control. Interest rates, however, today, maintain themselves at all-time lows and inflation is tame and stable. And, interestingly, if any real person in the market thought inflation posed a problem in the future, we'd see interest rates start to rise accordingly, but they aren't so that is why we know that neither are problems at all. What about all that money the Fed pumped into the economy - won't that add to inflation? No. That money has been largely doing what it has been doing for the better part of 4 years - sitting there not being lent or borrowed as 'excess' bank reserves. Surely as the economy picks up, more of this money will be floated into the broader economy, but that's ok - because along with this money increase will be an increase in production and economic output - which will act to tame any inflation.

So, Republicans continue their airless rhetoric about 'imposing costs on future generations' and all that nonsense which has absolutely nothing to do with reality.

Democrats aren't much better - allowing significant back-breaking tax increases not just on the rich but on the average Joe. We could have avoided not just the taxes on those making >$400K, but also the 2% social security payroll tax increase that hit most Americans' paychecks this week. Both of these tax increases, it is estimated, may reduce the output of our fragile economy by nearly a whole 1% point of GDP in the coming year.

The better alternative would just have been to continue to do what America does best: borrow. There's never been a better time to do so in a market with record low interest rates after all! Everyone wants our bonds as it is what with China continuing to be shaky and Europe still very much in a crisis. Borrowing, at the end of the day is simply issuing US-denominated bonds for US currency, both of which can be converted into each other - hence the reason why government borrowing is like borrowing from oneself - the US controls its own currency after all. There are certain technical political restrictions which make the intersection of our fiscal and monetary policy a bit convoluted at present, but there are those in congress and in academia advocating for a most realistic change to our system to accommodate the simple fact that 'debt' by the federal government is not really 'debt' at all.

13 comments:

I've always thought a clear-eyed look at the situation would lead to what you are recommending: borrow more. Your last paragraph is something that I've been thinking, and something that I've had varying success is expressing to others.

The culture of "deficit hawks," or, as I prefer to call them, "deficit scolds," has burrowed itself into the American consciousness in a very unhealthy way. I wonder what is the best way to push back against it.

For example, deficit scolds tend to talk about the national debt by analogy with a family's debt. But, this seems strange on its face because a family can't make its own currency, whereas a government can. I don't have much formal education in economics but that seems like a common sense distinction that is purposefully glossed over. Do you have any thoughts about why this distinction is not emphasized? My only theory is that it takes a little more time than the typical news network has patience (and this theory also reveals my opinion on the mainstream "news" apparatus).

You are right on track I think. Persons, individual cities, counties and States, are fundamentally different from the government of the United States because they have to borrow to pay debts at the end of the day. The US does not. Actually my most recent post discusses this a bit more if you care to read.

There are a group of academic economists that truly understand this distinction if you aren't aware and are interested in further reading:

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Garth Brazelton

About Me

I work for the Indiana Economic Development Corporation as the Director of Operations and Business Systems, and I teach macroeconomics at Indiana University (Indianapolis). Previously, I was an Economist at the US DOT in Cambridge, MA. This blog does not represent the opinions of any of these organizations.